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Simpson Inc. uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to its various jobs. At the beginning of the year, the company estimated manufacturing overhead would be $400,000 and direct labor hours would be 40,000. The actual figures for the year were $430,000 for manufacturing overhead and 42,000 direct labor hours. Is manufacturing overhead underapplied or overapplied for the year? By how much?
First, calculate
the predetermined overhead rate (based on direct labor hours (DLH)) as follows.
Predetermined
overhead rate = Estimated overhead costs ¸ Estimated
direct labor hours
Predetermined
overhead rate = $400,000 ¸ 40,000 direct
labor hours = $10.00 per DLH
Then, determine
the amount of manufacturing overhead applied during the period:
Overhead applied
= Predetermined overhead rate x Actual direct labor hours
Overhead applied
= $10.00/direct labor hour x 42,000 direct labor hours = $420,000
Finally, compare
the actual manufacturing overhead costs to the amount applied and decide
whether it is underapplied or overapplied:
|
Actual
|
$430,000
|
|
Applied
|
420,000
|
|
Balance (underapplied)
|
$ 10,000
|
